Market Update: Fourth Quarter, 2017

2017 was quite a remarkable year for stocks! Nearly every corner of the globe experienced strong positive stock returns – large companies, small companies, international developed, emerging markets, and the list goes on.

In particular, the S&P 500 Index has been on a record-busting tear, experiencing positive total returns every single month in 2017. This is the first time in records going back to 1970 that’s happened. Additionally, these returns were delivered in an exceptionally smooth ride, with the fewest up-or-down return swings of 1% or more since 1965. The biggest single-day drop in 2017 was just under 2%.

The S&P 500 Index gained 6.1% during the year’s final quarter and overall returned 19.4% in 2017. Small company stocks, as measured by the Wilshire US Small-Cap Index, posted a 3.6% gain over the final three months of the year, to stand at +13.4% for 2017.

While US stocks did well, foreign stocks did even better. The broad-based EAFE index of companies in developed foreign economies gained 3.9% in the recent quarter, and ended the year up 21.8%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose 7.1% in the fourth quarter, giving these stocks a remarkable 34.4% gain for the year.

Even bonds fared reasonably well in 2017. The US Barclays Aggregate Bond Index gained 3.5%, enough to stay ahead of inflation. Yields on 10-year Treasury bonds, at 2.40%, finished the year slightly lower than they started at 2.45%, but, there are signs that interest rates may finally start moving off of record low levels. The Federal Reserve anticipates raising the Fed funds rate 3-4 times in 2018. And there is reason to believe that economic growth could accelerate in 2018.

This was a year when investors ignored the dire headlines, North Korean missile threats, investigations of the Trump administration and possible Russian collusion, the president’s wacky antics, devastating hurricanes, and adding yet another $1.5 trillion to the U.S. federal budget deficit over the next ten years, to produce one of the smoothest investment rides in the past century.

How long can this continue? Unfortunately my crystal ball is away for servicing, but I can tell you this: The S&P 500 is now trading at around 18 times forward earnings, which is above the historical average of 16. Loosely translated, this means you aren’t getting a bargain when you buy stocks today. At the same time, however, we are experiencing low unemployment rates and solid profits for American companies. Last month’s tax cuts, including the corporate tax cut from 35% to 21% will certainly add to those profits. The US economy grew at rate of 3% (annualized) in 2017 and predictions are for that to accelerate this year.

Interestingly, the psychology of the markets doesn’t match what we traditionally see at market tops: people still seem to be suspicious about how long the market rally will last, unlike the normal buying frenzy that often presages the next sharp downturn. (To see what a market frenzy looks like, are you hearing more about bitcoin than you have in the past?)

What are we to make of all this? As always, we turn to evidence-based investing, disciplined rebalancing, and your personal investment objectives to guide the way – whether it’s to enlighten us during dark and scary markets, or to offer a clear lens through which to view the recent above-average returns.

Has the smooth market ascent lulled you into forgetting what it feels like to be afraid? (Remember 2008?) Last year’s market growth has been gratifying indeed. But if your highest-flying holdings have significantly outpaced your planned allocations to them, our rules-based approach tells us when it’s time to get back on target, replacing blind ambition with thoughtful, “buy low, sell high” rebalancing.

Has the unprecedented run left you a little nervous? When it comes to market returns, there’s plenty of evidence to suggest that nothing this good lasts forever. But is there a right way to respond to this rational concern? Again, your investment objective tells us how and when to rebalance back to target in high-rising markets by shifting a portion of past gains away from market risk, without diminishing your desired exposure to future expected growth.

In short, whether current markets leave you enthused and excited, fearful and fretting, or a little bit of both, we remain committed to our principles and are sticking to our disciplined strategies for you: (1) applying evidence-based investment theory to your portfolio management, (2) adhering to your personal investment objective as our ongoing road map, and (3) incorporating rules-based rebalancing to help maximize your expected returns while minimizing the market risks involved. No strategy is guaranteed to succeed, but we continue to believe ours is the most practical approach to achieving your financial goals, come what may in 2018.

On that note, we wish you and yours a healthy, prosperous, and peaceful year ahead. Please let us know how we can help.

Web Site Access Acknowledgement

As a client of Del Monte Group, LLC (“Del Monte”), by selecting the “I Agree” button, I elect to participate in the password-protected access portion of Del Monte’s Internet web site. I understand that my participation will allow me to review certain investment-related information published by Del Monte and unaffiliated third parties. This password-protected access is made available to clients of Del Monte free of charge. This authorization shall continue until canceled in writing.

I understand that the password-protected section is a secure web site intended only to allow a client access to information relative to his/her/its specific account. I also understand that I will be assigned an individual password. I agree not to share my password with any other person. I understand that Del Monte’s Internet web site does not provide me with the ability to direct account transactions (i.e., place orders, make withdrawals, etc.), except through certain linked third party web sites. I hereby release and hold Del Monte harmless from any adverse consequences relative to any failure by me to keep the identity of my password secure.

I agree and understand the information being presented.

Disclaimer

Important Disclosure Information

Del Monte Group, LLC (“Del Monte”) is an SEC registered investment adviser located in Alamo, California. Del Monte and its representatives are in compliance with the current filing requirements imposed upon SEC registered investment advisers by those states in which Del Monte maintains clients. Del Monte may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Del Monte’s web site is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Del Monte’s web site on the Internet should not be construed by any consumer and/or prospective client as Del Monte’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Any subsequent, direct communication by Del Monte with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Del Monte, please contact the SEC or the state securities regulators for those states in which Del Monte maintains a notice filing. A copy of Del Monte’s current written disclosure statement discussing Del Monte’s business operations, services, and fees is available from Del Monte upon written request. Del Monte does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Del Monte’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Del Monte), will be profitable or equal any historical performance level(s).

Certain portions of Del Monte’s web site (i.e. newsletters, articles, commentaries, etc.) may contain a discussion of, and/or provide access to, Del Monte’s (and those of other investment and non-investment professionals) positions and/or recommendations as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Del Monte, or from any other investment professional. Del Monte is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice.

Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Del Monte is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of Del Monte by any of its clients. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser.

Each client and prospective client agrees, as a condition precedent to his/her/its access to Del Monte’s web site, to release and hold harmless Del Monte, its officers, directors, owners, employees and agents from any and all adverse consequences resulting from any of his/her/its actions and/or omissions which are independent of his/her/its receipt of personalized individual advice from Del Monte.